How ratings analysts judge insurance companies

Researching the financial health of your life insurance company is just as important as researching prices and coverage options when you are shopping for an insurance policy. Financial strength ratings are especially important for life insurance because you want to be assured that your life insurance company will be around 10, 20, or 30 years from now — or whenever you pass away and your beneficiaries go to claim the insurance money.

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Yet financial strength ratings are probably the most-ignored component of the life insurance buying process. A number of companies provide ratings for the financial strength, also called claims-paying ability, of insurance companies. Jack Dolan, spokesperson for the American Council of Life Insurers, says, "Consumers want to know that their insurance company will be around when benefits are needed and that could be decades away. So you want a company that is financially strong."

Each ratings provider uses a different system for "grading" insurers, so one ratings company's A is not the same as another's A. However, you can still determine if your insurer has a strong rating. In addition, Dolan recommends that you ask your state insurance department or insurance agent about the financial strength of the company from which you plan to buy life insurance.

We asked each major ratings company how it goes about its business.

A.M. Best

A.M. Best specializes exclusively on rating the insurance marketplace. The company considers an insurance company's balance sheet strength, operating performance and business profile to determine each company’s rating.

Insurance companies that want to be rated contact A.M. Best and pay a fee to be rated, which covers primarily administrative costs. Andrew Edelsberg, vice president in A.M. Best's life/health ratings division, says that the fee does not influence A.M. Best's rating of an insurer: "I’m an analyst, so it doesn’t matter to me if a company pays $1 or a $1 million to be rated," he says.

Edelsberg explains, "We form an opinion built on careful analysis of a company's financial information. We also interact with management to best understand all the risks of its business."

"To gain insight into the company’s future, we listen to calls, meet with management, and follow the news of the day on a regular basis to determine what that might mean to the companies we rate," says Edelsberg. A.M. Best updates ratings at least every 12 to 36 months, or as events occur that could influence a company's finances. Edelsberg notes that not every event requires a ratings change. For example, a small lawsuit against a company and a fine by the National Association of Insurance Commissioners may not be significant enough to merit a ratings review.

When you're buying a life insurance policy, Edelsberg suggests that you first consider companies that have a secure rating such as A+ from A.M. Best.

Not every insurer ends up happy with its rating. "No one wants a bad review," he says. "Our rating is an opinion based on over one hundred years of analyzing companies. Some companies feel that their ratings should be higher, but keep in mind we are objective when we approach this because it’s an opinion. The best way to prove us wrong is to make improvements where needed to perform better the next time. We would tell them this: 'We think this is risky, so if you reduce your exposure this should help your rating.'"

You can search A.M. Best's ratings on its site and also purchase insurer reports that show company history and market share.

When you're buying a life insurance policy, Edelsberg suggests that you first consider companies that have a secure rating such as A+.

Fitch Ratings

Fitch Ratings uses these criteria for determining a life insurance company’s financial strength rating: How well a company is organized and operated, the strength of its management team, its strategies, its corporate decision-making process and the degree of the risk in its market. For example, a property/casualty insurance company tends to take on more risk than a life insurer.

Fitch conducts a financial review that includes examining the insurer’s statutory financial statements that are filed with state regulators. Where available, Fitch also reviews the company’s unaudited financial statements, management reports and company projections. Fitch updates its ratings at least once a year. Its ratings range from AAA (highest) to D (default).

A Fitch rating of BB+ or higher is considered "investment grade."

Sandro Scenga, spokesperson for Fitch Ratings, says that his company does not make recommendations about insurers based on ratings but that a rating of BB+ or higher is considered "investment grade."

Fitch charges insurers for conducting ratings evaluations, which are freely available on the Fitch Ratings Web site.

Moody’s Investors Service

Moody's Investors Service uses these key factors in determining an insurer's rating:

Lack of company liquidity affects insurance policies
The current problem in the credit market is a lack of liquidity, says Levine. For the consumer, this can be devastating. A lack of liquidity can result in a company’s inability to meet the demands of its liabilities. As a result, financial troubles, real or perceived, can compel policyholders to surrender their policies or withdraw their money from banking accounts.

An example in the banking industry is the collapse of Washington Mutual bank, which became insolvent and was seized by the government.

Business profile

  • Market position
  • Brand distribution
  • Product focus
  • Diversification

Financial profile

  • Asset quality
  • Capital adequacy
  • Profitability and ALM
  • Financial flexibility

To determine a company’s financial strength, Moody’s looks at the amount of assets a company owns, its performance history and the quality of its investments. They also consider the ability of a company to pay its debts.

"All of these factors helps us determine how much cushion the company has to absorb unexpected losses," says Joel Levine, senior vice president and team leader for the credit monitoring division at Moody’s Investors Service. Moody’s has assigned its Insurance Financial Strength (IFS) ratings to 238 life insurance companies.

"The average IFS rating is A1, and only 15 percent of the total IFS ratings are rated below A," Levine says. "Fewer than 6 percent of the insurers we rate are below Baa."

Levine notes that if he were to purchase a life insurance policy he would want an investment grade issuer with an A1 rating or better.

Moody’s reevaluates its ratings as often as needed. Levine says, "We don’t operate on a calendar schedule. If we are working with a company in stress, we have many ongoing conversations with them as we monitor the situation. In a crisis situation, we would be following up with the company on a daily or weekly basis."

Moody’s reports are only available to those they rate and by subscription, but you can call Moody’s Ratings Desk in New York at (212) 553-0377 to request the rating of any company.

Standard & Poor's

Can an insurance company withdraw its S&P rating?
Once an insurance company’s rating makes the public record, it cannot withdraw the rating.

"They cannot erase history," says Bob Swanton, Standard & Poor’s ratings analyst.

However, if an insurance company is evaluated for the first time and its rating is not good, it can choose not to accept the rating, he says. That means that there will be no public record that the company ever underwent a ratings analysis.

An insurance company may also choose to discontinue its annual ratings analysis. That often happens when insurance companies are facing financial difficulty and expect their ratings will drop. However, Standard & Poor’s will still reassess the company’s rating on its own, which prevents the insurance company from keeping a high rank if it slips into difficulty.

Standard & Poor’s ratings analysts examine a variety of insurer financial statements along with an in-depth look at the insurer’s management team, company strategies and ability to manage its risk. In addition, S&P evaluates the diversity of the products sold and the company’s financial history, economic environment and competitive position. S&P updates its ratings once a year in a full annual review but also hosts quarterly discussions with the company. It charges insurers for conducting its ratings evaluations.

S&P uses a ratings system from AAA (highest rating) to D (default), with plus and minus signs within each ratings category, with the exception of the highest and lowest grades.

S&P ratings can be found through Insure.com's Insurance Company Ratings Lookup tool.

TheStreet.com Ratings

The Street.com Ratings (formerly Weiss Ratings) uses five criteria for determining a life insurance company’s financial strength rating: capitalization, profitability, investment quality, liquidity and operational stability.

Any insurance company that is rated B+ or higher by TheStreet.com is recommended.

"Capitalization is weighed the heaviest, but they are all significant," says Melissa Gannon, vice president of insurance and bank ratings. Considered within those five categories are the degree of risk in the company’s business profile and the types of investments it makes. The largest single factor that affects an insurance company’s rating is the status of its statutory financial statements (which the insurance company must file with state regulators), Gannon says.

In addition, TheStreet.com Ratings asks the insurer to take a survey and demands to see certain confidential information such as the company’s asset liability matching studies, guarantees of solvency and internal documents that aren't public.

The Street.com Ratings updates its ratings quarterly. Its ratings fall on a scale of A to F and each letter can carry a plus or minus (the highest rating is an A+). Any insurance company that is rated B+ or higher is recommended, Gannon says. The Street.com Ratings is unusual in that it does not charge an insurance company for being rated. Its revenue comes from the sale of ratings, reports, books and other consumer information products.

TheStreet.com's Ratings Screener allows you to look up ratings for free.

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